In many areas of the economy, especially in construction – in the widest sense of the word, system manufacturing, machinery, etc, it is common practice for clients to demand security or deposits from their business partners in return for the awarding of a contract. This can be in the form of bonds or guarantees which are usually issued by the principal bank.
Specialized insurances companies can be seen as an alternative solutions provider for many companies as bonds/guarantees can be a very helpful supplement to the liquidity of a company.
Understanding Your Risks
A common and increasingly widespread alternative is to outsource the need for bonds to special insurers who – like banks – provide guarantees or bonds to contractors.
Under a bond / guarantee insurance, the insurer assumes liability for the policyholder (= client = contractor) towards third parties for a wide variety of security purposes: for example, for the contractor`s obligations under construction and supply contracts.
This offers couple of advantages:
The guarantees issued within the framework of the facility agreement imply, like bank guarantees, an abstract payment obligation on the part of the insurer. Before issuing a guarantee insurance policy, the insurer carries out a comprehensive credit assessment of the contractor, based on financial statements (balance sheets, profit & loss statements, etc.). Essential criteria for the premium calculation are the creditworthiness of the contractor, the bond credit facility and the types of the chosen bonds / guarantees.
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